FRANCHISING PARTNERSHIPS FOR ROADS ENGINEERING INFRASTRUCTURE OPERATION AND MAINTENANCE?

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1 FRANCHISING PARTNERSHIPS FOR ROADS ENGINEERING INFRASTRUCTURE OPERATION AND MAINTENANCE? KEVIN WALL CSIR BUILT ENVIRONMENT Presentation to SATC 2008

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3 1. A partnership model A partnership model To assist the owners of water services infrastructure To operate and maintain The infrastructure that they continue to own.

4 Can franchising principles be applied where appropriate to water services operation and maintenance?

5 Challenge: You are road experts over to you if and how you can apply this franchising partnership concept to roads infrastructure operation and/or maintenance

6 2. WS franchising partnerships Both could Build CBOs and small entrepreneurs, and create local economic development; and Assist municipalities by providing the higher-level expertise in WS operations and maintenance that those outside the metropoles and larger urban areas would not have.

7 Jay Bhagwan (Water Research Commission) Kevin Wall (CSIR)

8 Two happy Singaporean customers of a SMME franchisee

9 3. Introduction Capacity of many South African municipalities to adequately provide all with even basic water services is in question Inadequate operation and maintenance Inadequate competencies Need for new alternative provider options ESPECIALLY FOR OPERATION AND MAINTENANCE Investigation by WRC and CSIR

10 Continued.. However - even if all the existing institutions were coping with operation and maintenance, there would be good reason to investigate alternatives to see if they could offer: More cost-effective? Allow existing institutions to focus on other responsibilities (share the load)? Greater community participation? SMME opportunities? BEE opportunities?

11 4. First study Understand franchising generically Literature survey to discover franchising (if any) in water sector Scope the (non-water services) franchising industry in South Africa Assess appropriateness of franchising to water services sector in South Africa

12 5. Franchising (Generic -- but background question: Is there scope for small WS business enterprises?) Barriers to entry of startup businesses are substantial Driving forces of franchise concept: Incentive: profits/dividends/surplus (for water services, this requires mindshift that it need not be wrong for profits to be made), and A successful business model that can be copied (Note: very few elements of water services have been modelled)

13 Levels of skill and obligations Each person correctly skilled, and contractually bound On most days, nothing extraordinary happens. Low-level skilled staff able to cope. When major maintenance, or upgrading, or breakdown those staff know who to call, who will bring the higher level of skill And they know that the people they call WILL help, because there is a binding contract Cost of the higher-skilled, who are needed only intermittently, is spread among many sites thus cost per site is low

14 Franchisor Franchisee 1 Franchisee 2 Franchisee receives business know-how from franchisor; and provides services or products to customers Franchisor monitors quality of product/service to customers Customers pay franchisee for products and services, and a % is passed back to the franchisor

15 Cardinal elements of business format franchising : Discovering good practice Identifying component of value chain that is simple enough to systematise Systematising the business Quantifiable and rewardable outcomes Training Operations manuals Continuing support, control and discipline of the on-going business Research and development

16 6. Franchising in South Africa 400 franchise systems employed More than franchised outlets - many first-time entrepreneurs 6.5% of national retail turnover (excl petroleum) Everything else being equal, franchised businesses have a far lower failure rate than do independent businesses

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19 Business Day Real Business May 2006

20 7. Overseas literature survey Some franchising features found in other forms of water services contract, but without all the elements (e.g. with quality control, but without ongoing support) World Bank (van Ginneken, Roche, et al) concluded that water services franchising shows great promise especially small towns and rural areas

21 A very successful South African franchise (established 1980), with mostly private sector customers

22 8. Current SA water services institutional arrangements Customers Regulator (i.e. national Dept of Water Affairs) Funding partner (e.g. government, donor) Municipality (i.e. water services authority (= WSA)) Water services provider (WSP) which could be: WSA itself Another municipality NGO CBO Water board SMME Other (or NGO, CBO, SMME, etc could be subcontractors to WSPs)

23 9. Water services franchising in South Africa findings Great need for alternative water service operation and maintenance provider systems Potential through water services franchising to simultaneously: Improve water services delivery, and Promote local economic development, SMME development and BEE Thus franchisee must be added to the list of possible WSP types Unsuitable for e.g. constructn new infrastructure

24 Thus WSP could now be: Municipality (WSA) itself Another municipality NGO CBO Water board SMME Other (or NGO, CBO, SMME, etc could be subcontractors to WSPs) SMME franchisee

25 In practice, however, it is unlikely that a SMME would be a WSP directly contracted to a WSA. The small size of SMMEs counts against this. In nearly all conceivable circumstances, the WSA will contract with one or a small number of prime WSPs in its area, and these will in turn contract with smaller sub-wsps WSPs including the likes of CBOs and SMMEs.

26 Franchisees are SMMEs, but with the support of the franchisor: What is good or bad for SMMEs is good or bad for franchising. But the converse doesn't necessarily apply or, putting it differently, a franchisee SMME, given the support it would receive from the franchisor, would in all likelihood find it easier to meet some regulatory and other requirements than would a standalone SMME, everything else being equal.

27 10. Second WRC study Completed, in course of publication Review statutory, procurement and other issues which could impact Identify elements in water services delivery chain which offer greatest scope for franchising Develop franchising models Develop guidelines for setting up water services franchising Set out the way forward to pilot implementation

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29 Water services delivery chain We looked at all elements, asking where value can be added Selected long list, then shortlist We have modelled elements on paper, but based on non-franchise experience of same elements FASA good advice don t model, for franchising, an element you don t already know well

30 Whereas a business based on a single element of the water services delivery value chain might not be viable, a franchisee might be able to make a viable business by offering several water-related services, thereby achieving dual objectives, viz: economy of scale; and lessening its dependence on one or a limited number of clients.

31 Pilot projects will be two types: Franchisee water services partners offering a full range of water services (more appropriate to the small town or rural situation) Franchisees partners who offer selected services under contract to (full) water services providers or retail to the private sector (for example water quality testing, meter reading, training, customer relations and water demand management) Of course, with franchisors

32 What a franchisee of municipal infrastructure could typically look after

33 Franchise better than a municipality that isn t coping?

34 Can we get all of our municipalities to this quality?

35 It is hoped that potential franchisors will seize the opportunity, and do the detailed modelling to suit their abilities and the circumstances. Amanz abantu and Biwater are seizing the opportunity

36 What a schools sanitation franchisee could typically look after What a schools sanitation franchisee could typically look after

37 Three significant issues : These are primarily issues facing outsourcing (irrespective whether NGO, large PO, SMME, or SMME franchisee) Municipality s operation and maintenance budget too small Unreliable payment Municipal (and union) resistance to outsourcing, even of O&M

38 Principles document covers: What is franchising When are franchising partnerships an option Environment and roleplayers Structuring WS franchising Policy, statutory and financial implications Critical success factors for franchised WS partnerships Resources available

39 11. To conclude: the essentials are: Service to customers meets the specification in the franchise contract with the municipality Suitable franchisors are willing Local entrepreneurs are willing to take up water services franchise opportunities Franchising proves a viable business for franchisor and franchisee The funding partners finance WS franchising just as they support WS provision anywhere else

40 First picture from Phoenix spacecraft touchdown on Mars: 25 May 2008 You will be amazed at what franchising can achieve!

41 EVERYTHING IS POSSIBLE

42 WRC Report No. KV 161/05 Water Research Commission, South Africa

43 The END

44 Challenge: You are road experts over to you if and how you can apply this franchising partnership concept to roads infrastructure operation and/or maintenance

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46 Present relationships Regulator (i.e. DWAF) Regulations Contract payments WSA Capital and ops funds e.g. ES, CMIP Contracts Funding partner e.g. govt, donors WSP e.g. WSA, NGO, water board Service Service agreements Payment of service charges Customers

47 Present relationships with franchising alternative added Regulator (i.e. DWAF) Regulations WSA Capital and ops funds e.g. ES, CMIP Funding partner Franchisor partner Contract payments Contracts e.g. govt, donors Technical advice, training, ongoing support, etc Management fee Franchise contract WSP Service Service agreements Customers e.g. WSA, NGO, water board, SMME franchisee Payment of service charges